RESP accumulated income payment simplified

Plain-language summary

• An accumulated income payment, or AIP, is usually the leftover investment growth in an RESP when the money is not being used through eligible education withdrawals.
• An AIP is not the same as getting your own contributions back. Your original contributions can usually be refunded tax-free, but an AIP is taxable income.
• CRA says AIPs can only be paid to one subscriber at a time, and the subscriber receiving the payment must be resident in Canada.
• The normal tax result is regular income tax plus an extra 20% tax, or 12% if the subscriber lives in Quebec.

Action steps

1. Ask your provider to break the RESP into three buckets before you do anything: your contributions, government grants and bonds, and accumulated earnings.
2. Confirm whether the plan contract actually allows AIPs, because CRA rules permit them only if the RESP terms also allow them.
3. Check whether at least one CRA AIP condition is met: the plan is old enough and all beneficiaries are old enough and not EAP-eligible, a beneficiary has died, or a beneficiary has a severe and prolonged mental impairment that prevents enrolment in a qualifying program.
4. If you want to reduce withholding through an RRSP transfer, ask whether you qualify for Form T1171 and whether you have enough RRSP room before the payment is processed.
5. Ask the promoter what grant, CLB, and provincial incentive amounts must be repaid before or with the AIP, because those amounts do not come out to you as earnings.

Caveats to watch

• AIP eligibility is stricter than 'the child did not go to school.' CRA's standard timing rule usually requires the RESP to have passed the year that includes its 9th anniversary and every beneficiary to be age 21 or older and not currently eligible for an EAP.
• You do not need to close the RESP to receive an AIP, but a provider may still require closure paperwork or other internal steps before releasing it.
• Joint subscribers cannot receive one combined AIP. CRA says payments must be made separately to each entitled subscriber.
• An RRSP transfer is not automatic tax forgiveness. The payroll guidance ties the withholding waiver to Form T1171, a direct transfer, and the CRA conditions for the recipient.
• Government incentives and related earnings are not a free fourth bucket. Canada.ca says unused CESG, CLB, and provincial incentives generally have to be returned when the education path does not work out.

Examples

Example: RESP no longer needed after age 21

A subscriber has an RESP that has been open for more than 10 years. The only beneficiary is now 22 and is not eligible for an EAP. The subscriber may be able to withdraw the remaining growth as an AIP, but the growth would normally be taxable and could face the extra 20% tax unless an eligible RRSP transfer reduces it.

Example: own money comes back differently from growth

A family no longer needs an RESP and the account still holds both contributions and earnings. The subscriber's own contributions can usually be refunded without tax. The earnings portion is the part that may become an AIP, while unused grants and bonds usually have to go back to government programs.

When an AIP is usually allowed

• CRA's main test is timing plus beneficiary status: the plan has existed long enough, and each living beneficiary is old enough and not currently eligible for an EAP.
• Two other routes can also open the door: a beneficiary's death, or a severe and prolonged mental impairment that prevents the beneficiary from enrolling in a qualifying educational program.
• Even when one of those rule sets applies, the provider still has to administer the payment within the RESP contract and the government reporting rules.

What the tax hit really means

• AIPs are reported on a T4A slip and count as taxable income to the recipient.
• The extra 20% tax is on top of normal income tax, which is why families often describe AIPs as the expensive way to end an RESP.
• Canada.ca says some subscribers may be able to transfer up to $50,000 of earnings to an RRSP using an AIP path, but that should be treated as a rule-and-paperwork check, not a default entitlement.

Questions to ask your provider before requesting an AIP

• Does this RESP contract allow AIPs, and what documents do you require before approving one?
• Which exact CRA condition are you relying on for this AIP request?
• How much of the remaining balance is contributions, how much is incentives, and how much is accumulated earnings?
• What incentive repayments will happen when this AIP is processed?
• If I want an RRSP transfer, will you process Form T1171 and send the amount directly instead of paying it to me first?

Official sources